Investment Agreement Vs Shareholders Agreement
Investment Agreement vs Shareholders Agreement: Understanding the Difference
When starting a business or raising funds for a startup, it is important to have legal agreements in place to avoid disputes and protect the interests of all parties involved. Two such agreements that are commonly used in the business world are investment agreements and shareholders agreements. While both serve a similar purpose, they have some significant differences that should be understood before signing on the dotted line. In this article, we will explore the differences between these two agreements and how they can affect your business.
What is an Investment Agreement?
An investment agreement, also known as a subscription agreement, is a legal document that outlines the terms and conditions of an investment made by an investor into a company. It is typically used in the context of raising capital from angel investors, venture capitalists, or private equity firms. The agreement lays out the amount of money being invested, the percentage of ownership the investor will receive, and any other conditions or obligations that the investor must follow. The investment agreement is a binding contract that protects both the investor and the company, ensuring that everyone is on the same page before the deal is finalized.
What is a Shareholders Agreement?
A shareholders agreement, on the other hand, is a legal document that governs the relationship between the shareholders of a company. It outlines the rights and obligations of each shareholder, as well as the procedures for decision-making, voting, and conflict resolution. The shareholders agreement is designed to protect the interests of all shareholders, whether they are majority or minority stakeholders, and to provide a framework for the management of the company.
Key Differences between Investment Agreement and Shareholders Agreement
While both investment agreements and shareholders agreements deal with ownership and control of a company, they differ in some key aspects. Here are the main differences between these two agreements:
1. Timing: Investment agreements are signed before an investor puts money into a company, while shareholders agreements are signed after the investment has been made. Typically, the shareholders agreement is signed by all shareholders at the same time, whereas the investment agreement is only signed by the investor and the company.
2. Scope: Investment agreements are focused on the terms and conditions of the investment, including the amount of money invested, the valuation of the company, and the percentage of ownership. Shareholders agreements are broader in scope and cover a range of issues that affect the relationship between shareholders, such as decision-making, voting rights, and transfer of shares.
3. Parties involved: Investment agreements are between the investor and the company, while shareholders agreements are between the shareholders of the company. This means that all shareholders need to agree to the terms of the shareholders agreement, whereas only the investor and the company need to agree to the terms of the investment agreement.
4. Binding nature: Investment agreements are binding contracts that establish the terms and conditions of the investment, and set out the rights and obligations of both the investor and the company. Shareholders agreements, on the other hand, are not always legally binding, depending on the jurisdiction and the specific wording of the document.
Conclusion
In summary, investment agreements and shareholders agreements are two different legal documents that serve different purposes. While investment agreements are focused on the terms and conditions of an investment, shareholders agreements are designed to govern the relationship between shareholders in a company. Both agreements are important for protecting the interests of all parties involved, and should be carefully reviewed and negotiated before signing. If you are raising funds for your startup or starting a new business venture, it is highly recommended that you seek the advice of a legal professional to help you draft these agreements and ensure that your interests are protected.